IDCW vs Growth - Differences, Taxation, Example, Returns

As an investor, we are offered mainly 2 options while investing in a mutual fund. Firstly, invest your funds in a growth fund which means your investments and returns generated in the fund keep getting reinvested for capital appreciation over time. The second option which is the IDCW plan (Income Distribution cum Capital Withdrawal plan) allows the investors to generate income from the fund at regular intervals. In this article, we will discover the meaning and key differences between IDCW and Growth and understanding which is a better choice for investment.

What is the IDCW plan?

IDCW stands for Income Distribution Cum Withdrawal is a method in mutual funds where the profits generated by the fund scheme are paid to the investors at predetermined dates it can be monthly, quarterly, semi-annually or even annual basis. 

Unlike growth plans where profits are reinvested, IDCW withdraws a portion of the profits, reduces the NAV, and credits the amount to the investor’s account at regular intervals. This option is mainly suitable for individuals who seek a passive income stream from their investments instead of keeping the funds till the end for capital appreciation.

What is the Growth Plan?

It is a method of investing in potential companies that will be able to generate high returns over time. The growth mutual fund reinvests the profits and gains back in the mutual fund scheme allowing it to grow your funds and generate higher returns. 

As the investments increase the NAV of the scheme grows further which is why it is termed the Growth option plan. This method is generally opted for by investors who seek to build their wealth through long-term appreciation of their invested funds.

What are the Differences Between Growth and IDCW?

How to Choose and Invest: IDCW vs Growth Options

How to Invest in an IDCW Option Plan?

Here are the steps to learn how to invest in an IDCW option Mutual fund scheme:

1. Research and Identify a Mutual Fund:

Research the mutual funds available in the market that offer the IDCW option plan and learn about their historical performances and the frequency of IDCW payouts.

2. Choose a platform to invest:

One can start their investment journey through various platforms namely, mutual fund websites, investment firms, or online brokers like Rupeezy which provide detailed analysis of every scheme helping the investors make informed decisions about their investments.

3. After selecting the mutual fund select the IDCW option:

While investing make sure to select the IDCW option and proceed to apply for the scheme.

4. Start your Investments:

Decide on the amount you want to invest in the scheme. You can either choose to invest as a lump sum amount or can start a SIP for regular periodic investments.

5. Regularly monitor your investment:

After the process, constantly monitor your investments and make sure that the income distribution aligns with your financial goals.

How to Invest in a Growth Option Plan?

Here are the steps to learn how to invest in a Growth option Mutual fund scheme:

1. Research and Identify a Mutual Fund:

Research the mutual funds available in the market that align with your financial objectives, investment horizon, and risk appetite. Ensure that the fund’s performance and other metrics are positive in the past.

2. Choose a platform to invest:

One can start their investment journey through various platforms namely, mutual fund websites, investment firms, or online brokers like Rupeezy which provide detailed analysis of every scheme helping the investors make informed decisions about their investments.

3. After selecting the mutual fund select the Growth option:

While investing make sure to choose the Growth option instead of the IDCW plan and proceed to apply for the scheme.

4. Start your Investments:

Decide on the amount you want to invest in the scheme. You can either choose to invest as a lump sum amount or can start a SIP for regular periodic investments.

5. Regularly track your investment:

After the process, constantly monitor your investments and make sure that the income distribution aligns with your financial goals.

IDCW vs Growth Mutual Fund: Taxation

As per the income tax rules, the dividends received from the mutual fund received from mutual funds will be taxable based on the investor’s tax slab rate. So, in the case of the IDCW plan the income generated will be taxed only based on your tax bracket.

When it comes to the Growth option plans as the investments are allowed to grow and appreciate over time in the scheme the taxes applicable are based on their capital gains at the time of redemption. In the case of Short-term capital gains, it is charged at a 20% rate, and Long term capital gains at a 12.5% rate.

Also Read: Tax Haven and How to Save Tax 

IDCW vs Growth: A Case Study (Example)

Let’s say you invest Rs.1 lakh in a mutual fund at Rs.100 NAV.

IDCW Option:

• After a year, the fund declares a Rs.10 payout (IDCW). You receive Rs.10,000, and the NAV reduces to Rs.90.

• NAV after 3 years: Rs.105 (after payouts).

Growth Option:

• No payout; profits are reinvested. The NAV grows steadily.

• NAV after 3 years: Rs.135.

In the Growth option, your investment grows to Rs.1.35 lakh, while in IDCW, you receive interim payouts, but the overall growth is less.

Can We Switch from Growth to IDCW or Vice Versa?

Yes, you can certainly switch from a Growth plan to an IDCW option plan, but the investor will be charged with the exit load and the capital gains tax if applicable. This process includes the redemption of the units from one plan to purchase the units from the other because both plans will have different Net asset values.

Hence, it is necessary to understand the overall profitability of this switch from one plan to another as there are charges that would be incurred while exiting either of the plans.

IDCW vs Growth: Which is Better?

This is a very subjective question as the better option will depend on individual goals and objectives. This choice would highly depend on the investment objective, time horizon, risk appetite, and many more.

If in case you have a long-term objective like purchasing a plot, marriage, or even retirement the best option to opt for is a Growth plan as it would cater to the compounding and wealth creation over a while.

As an investor, if you have a short-term objective, like Loan repayment, or a Secondary source of income, the IDCW option will help you earn a regular income.

Conclusion

The choice between IDCW vs Growth option plans will depend on one’s financial objectives and their investment tenure. If you are looking for a long-term capital appreciation for your funds Growth plan is a better option. On the other hand, if you are looking for a regular income from your investment fund as a passive source it is advisable to choose the IDCW option plan.

It is necessary to consider your investment objectives, tax implications, and risk appetite to select the suitable option for your future. You can check out these Mutual fund plans in Rupeezy App and start your investment journey today.

FAQs

Q1. Which is better, Growth or IDCW?

Growth is better if you want to grow your money over time because the profits are reinvested, helping your investment grow faster. IDCW is better if you want regular payouts from your investment for some extra income.

Q2. Can I change IDCW to Growth?

Yes, you can switch from IDCW to Growth by asking your mutual fund provider. It may involve some tax implications.

Q3. Which SIP is better, IDCW or Growth?

Growth SIP is better for long-term goals as it helps your money grow more. IDCW SIP is good if you want regular payouts along with your investment.